Thursday, 10 June 2010

GUEST POST: Natural Laws of Innovation – 2

Conservation Law of Innovation: All innovations are combinations of existing/known elements. Conservation of matter (and energy) means that you cannot create something from nothing. As a result, all innovations must be a combination of existing or known elements.

Causality Law of Innovation: Invention precedes production, production precedes consumption and discovery precedes invention. In order to consume an item it first has to be produced. Production may just be the act of finding food for a hunter gatherer, but this has to be done before it can be consumed. With the possible exception of some very simple things, mother’s milk and air for instance, things have to be invented before they can be produced. The elements of all inventions are made of known items, so they had to be discovered before they could be incorporated into an invention.

Set Law of Innovation: The number of potential innovations is essentially infinite. There are essentially an unlimited number of potential innovations. Paul Romer, a professor of economics at Stanford, uses the following example to illustrate this point:

On any conceivable horizon — I’ll say until about 5 billion years from now, when the sun explodes — we’re not going to run out of discoveries. Just ask how many things we could make by taking the elements from the periodic table and mixing them together. There’s a simple mathematical calculation: It’s 10 followed by 30 zeros. In contrast, 10 followed by 19 zeros is about how much time has elapsed since the universe was created.[1]

Someone might object that Paul Romer has overstated the number of possible chemical inventions, since not all elements are able to chemically bind to each other. On the other hand, this calculation only includes one of each element. Some of our most important chemical compounds contain long chains of carbon and silicon atoms. In addition, the elements can bond to each other in multiple ways, ionic bonds, covalent bonds, polar covalent bonds and hydrogen bonds. Elements may also have double, triple and quadruple bonds. When you add in all these variations, Dr. Romer probably underestimated the number of possible chemical inventions. This calculation is only for chemistry. When you consider computer networks or electronic circuits with millions of transistors or nodes the number of different possible connection is n(n-1)/2 or easily equal to the number of combinations described for chemistry. This does not begin to name all the possible number of inventions. Previous innovations often are the basis of future innovations. As a result, the development of an innovation acts as node for additional innovations and increases the potential number of innovations rather than reducing the potential number of innovations. Another example that Romer uses to illustrate the unlimited number of possible combinations is all the possible bitstreams you can turn into a CD-ROM. The number is something in the range of 10 to the power of 1 billion, which virtually ensures that we will never run out of software to discover. He notes that there is not enough mass in the universe to make that number of CDs.[2]

The total number of innovations may be limited by the total mass and energy of the universe and the laws of entropy that limit how many elements can be combined.

Rate Law of Innovation: The rate of innovation is dependent on the number of innovators, the size of the set of elements the innovators can access, and the size of the set of goals. Innovations are combinations of elements and connections, but an individual has to put together these combinations. If more individuals are involved in the process of trying out combinations, then there is a greater likelihood they will find a useful combination or innovation. In a rough analogy, the more samples or children in an genetic algorithm, assuming they are diverse, the more likely or sooner you will find an acceptable solutions. Silicon Valley often creates many companies in a particular space, which function like a large population in a genetic algorithm, and results in an optimized solution (company) more quickly than only having a few companies in the space. Individuals create these sample combinations and test them against a selection criteria. If more people are creating these samples then you increase your probability of inventing a useful product of service. The corollary is that you have more “failures” than you have success. A successful solution to a particular selection criteria or fitness criteria has an increased probability if the creators (inventors) have access to the complete set of elements available in the world. When the inventors are limited in their selection or application of existing elements, then it reduces the potential number of combinations. It is possible in this case, that many solutions meeting the fitness criteria will not be part of the search space. This deceases the probability of finding a solution that fits the selection criteria. When innovators’ freedom of action is restricted it will decrease their chance of creating something useful. This is consistent with the tenet of academic freedom and consistent with the principles of a free market. Innovators as a group will be more successful if each individual innovator is allowed the freedom to pursue their own invention goal. There are at least two problems with restricting the goals of innovations. One, the individual talents and interests may fall into a forbidden area. Two, unexpected results may fall into a forbidden area and therefore not be pursued. As a result, we see that freedom fosters innovation. This is consistent with both our academic institutions’ policies and with a free market. Innovation is not encouraged by plagiarism. Plagiarism results in wasted resources, because the plagiarizer is reinventing the wheel and they erode the valve of the original innovator. Innovators are the first person to develop an innovation because they add to the store of human knowledge. Even innocent copycats do not add to the store of human knowledge. Note that freedom as used herein applies to everyone. Forcing someone to support your innovative activities, restricts their freedom to innovate. A corollary is that innovation is fostered by wide dissemination of earlier innovations. Without this dissemination, individuals will waste time recreating innovations.

Commons Law of Innovation: Innovations are not subject to overuse. The creation of innovations is subject to under investment without property rights in innovations. The diffusion of innovations is subject to under investment without property rights in innovations. Although there are unlimited number of potential inventions, this does not mean that creating them is free. The U.S. spends over $300 billion a year on research and development to discover inventions.[3] Just like real property conceiving inventions takes scarce resources. The number of researchers, research facilities, and research equipment are all limited. Each researcher’s ability to pursue various inventions and discoveries is limited. It will always cost less for a copier to produce existing items than create their own innovations without property rights in innovations. This will result in an under investment in the creation of innovations. Once an innovation or discover is made it still costs considerable resources to distribute the innovation. For instance, scientific principles are not subject to intellectual property rights and therefore can be freely disseminated. Calculus was discovered over 300 years ago and is not the subject of intellectual property rights. Despite this, only a small percentage of the population understands it even in the most advanced economies. Those people that do understand calculus generally paid an instructor to learn this area of math even though books on the subject can be reviewed for free at many libraries. Almost everything a student learns through formal education, even in graduate school, is information that is readily available. Even if the text book is copyrighted, the information is usually available in a non-copyrighted form or available for free from a library. In spite of this, the U.S. spends over $500 billion a year on all forms of education. Clearly, adopting and distribution ideas including inventions is not free. According to venture capitalists, most start-ups will spend 2-10 times the amount on marketing their inventions than on developing them. If the distribution of ideas was free, not subject to scarcity, this would clearly be unnecessary. University professors, doctors, lawyers, engineers, judges, marketers, sales people and computer scientists are mainly in the business of distributing or implementing known information. Most of these professional would be unnecessary if distributing information was frictionless. Distributing information is extremely costly, especially new information. Without property rights in innovations, most people and institutions will not spend the additional money required to create and distribute innovations. This will result in an under investment in innovation.

Income Law of Innovation:The per capita income of a large group of people can only increase over the long term if their level of technology increases. If we had exactly the same technology now as we did in 1800, would we be any better off per capita than the people of 1800? You might think that we would live longer. But, why would we live longer. We would have the same nutrition, sanitation, and medicine as them. We would have no advantages over our ancestors if we were limited to their technology. Our per capita income would be the same as the people of the 1800s. Modern economists have studied this issue and found that increases in capital goods are not nearly as likely to result in economic growth as innovation.[4] Robert Solow won the Nobel Prize in Economics because of his work on the causes of economic growth. His model suggests that fourth fifths of the economic growth of the U.S. is the result of technological progress. The other one fifth of growth was due to increasing population. Real per capita increases in income can only be the result of innovation. Adding capital without any innovation associated with the capital will result in elevating every worker to a certain efficiency level, however never above that level. Once every worker has the all the capital resources they can use in their job they have hit a maximum output without innovation.

[1] Bailey, Ronald, “Post-Scarcity Prophet: Economist Paul Romer on growth, technological change, and an unlimited human future,” Reason, December 2001.[2] Kelly, Kevin, “Paul Romer: The Economics of Ideas,” http://www.versaggi.net/ecommerce/articles/romer-econideas.htm, viewed July 4, 2009.[3] Kao, John, Innovation Nation: How America is losing its Innovation Edge, Why it Matter, and What We Can Do to Get it Back, Free Press, 2007, p. 39.[4] Clark, Gregory, A Farwell to Alms: A Brief Economic History of the World, Princeton University Press, 2007, p. 197.

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